RigNet Inc
Q1 2017 Earnings Call Transcript

Published: 9 May 2017

[Operator:]

Ladies and gentlemen, welcome to RigNet's First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session after the prepared remarks by management. [Operator Instructions]. I will now turn over the presentation to Chip Schneider, RigNet's Senior Vice President and Chief Financial Officer. Mr. Schneider, please proceed.

[Chip Schneider:]

Thank you, Andrew. Good morning, and welcome to today's call to discuss RigNet's first quarter results. With me today is Steven Pickett, CEO and President, as well as other members of our executive team. Yesterday after the markets closed, we issued a press release regarding our first quarter earnings. The release is available on our Web site at www.rig.net. Steve will begin today's call with a review of our first quarter business performance, and then I will follow-up with some financial details. Steve and I will then open up the call for the questions. Before we begin, let me remind everyone that our call will contain forward-looking statements. Except for historical facts, all statements that address our outlook for 2017 and beyond, as well as activities, events, or developments that we expect, estimate, believe, or anticipate may, or will occur in the future, are forward-looking statements, which involve substantial risk and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such statements. You can obtain more information about these risks and other factors in our SEC filings. Now, it is my pleasure to turn the call over to Steve Pickett.

[Steven Pickett:]

Thank you, Chip, and thank you to all of our listeners for joining this First Quarter Earnings Call. Today on our call, I'll provide a high-level summary of our first quarter financial results and talk about both our ongoing work to drive operational efficiencies and our efforts to expand our over-the-top solutions for customers. In terms of financial results, as outlined in our press release, first quarter revenues were $48.1 million, net loss attributable to common shareholders was $2 million or $0.11 a share, adjusted EBITDA was $7.2 million, unlevered free cash flow was $4.1 million and CapEx was $3.2 million. Revenue for the quarter was helped by a sale of telecommunications hardware to support an expanded relationship with a large oil and gas customer. Although the revenue performance for the quarter was impacted by the ongoing challenges in the offshore rig market, we continue to make progress managing costs and CapEx in order to drive unlevered free cash flow. CapEx for the first quarter decreased by $1.7 million, relative to the prior year quarter's spend of $4.9 million and decreased by $500,000 relative to the prior quarter's spend of $3.7 million. Our capital spend reflects our capital discipline and in the first quarter was substantially centered on success-based commitments to five large customers. Two of our five largest customers reaffirmed their confidence in RigNet by renewing their contracts during the first quarter. As a reminder on our restructuring and cost-cutting activities, in fourth quarter 2016, we initiated additional restructuring that will result in the reduction of approximately 6% of our workforce worldwide. We expect to substantially complete the plan by July 31, 2017, which should favorably impact our second half 2017 financial results. For the year end December 31, 2016, we implemented restructuring activities that includes the reduction of approximately 17% of our workforce in 2016 when after taking into consideration the TECNOR acquisition. In terms of our non-employee cost structure, we have renewed, or are in the process of renewing supply contracts with satellite service vendors that will begin reducing our cost of bandwidth starting mid-2017. We continue to look across our business to find ways to optimize our spend and to drive operational efficiencies that are supported by the new global organizational structure we put into place during the third quarter of 2016. In terms of our efforts to increase our over-the-top portfolio to further support our customers' needs, we made solid progress in the quarter. A global sales force has received additional training on over-the-top services and we continue to engage with many of our customers on this topic. As a result, we started trials with five additional customers in the first quarter who are now testing or have tested at least one of our OTT solutions. As a reminder, these solutions will provide a more relevant set of services for both energy and non-energy customers who will drive increases in ARPU and are expected to drive increased shareholder value as these are often higher margin services than our traditional advantage communication services. Recently, one of our trials resulted in a new three-year contract that will supplement the managed services that we deliver to that customer. This is two consecutive quarters that we have landed three-year OTT fleet-wide opportunities. This is expected to drive greater value for our customer and increased ARPU on these fleets. In terms of our managed services business, revenue decline to $44.1 million for the first quarter, compared to $47.2 in the prior quarter and $54.4 million in the prior year quarter due to continued reduced spending by oil and gas operators on offshore drilling projects. However, adjusted EBITDA managed services has increased slightly to $12.4 million in the current quarter, compared to $12.1 million in the prior quarter. Managed services' adjusted EBITDA was $15 million in the prior year quarter. Our unlevered free cash flow benefited from our work associated with cost containment and a more disciplined approach related to CapEx spending. Related to customer activity and since our last earnings call, total sites have increased by a net 74 from 921 to 995. Included in this increase are a net 10 offshore production sites which reflect key wins in the FPSO market and our efforts to further diversify with production related assets. The other 64 sites that were added were predominantly U.S. land-based sites. Although these U.S. land sites tend to have lower day rate, we think it is encouraging leading indicator of ENP activity. We also added two maritime sites. To provide a view on the current situation related to offshore rig stacking at the end of the first quarter, RigNet build on 173 offshore drilling rigs that represent a net decline of two rigs primarily due to stacking of rigs. SI&A revenues for the quarter were $4 million, compared to $5.6 in the prior quarter and $7.9 million in the prior year quarter. Under new leadership, our SI&A business is being streamlined and improved processes are being implemented globally. Since our last call, we've had two sizable contract wins totaling approximately $20 million that are expected to be realized over the next 24 months, which brings our total SI&A backlog to approximately $40 million. In terms of our work to add new capability and additional scale to our business, we continue to look for inorganic opportunities to grow through selected M&A activity and will continuously assess prospects as they become available. In closing, our efforts during the quarter resulted in $4.1 million of unlevered free cash flow and drove further improvements to our balance sheet. We are encouraged by the sign of recovery in the upstream sector as a whole where during the first quarter; we recorded increases in the number of sites that we are serving. We continue streamlining the business resulting in lower cost and better service consistency for our customers around the world. I'd like to thank our RigNet team members for their hard work and their personal commitment to our business and I thank all of you on the call for your interest in RigNet. With that, I'll turn the call back over to Chip for a more detailed financial review. Chip?

[Chip Schneider:]

Thank you, Steve. As Steve mentioned earlier, quarterly revenue was $48.1 million during the first quarter of 2017, representing a decrease of $4.7 million compared to the prior quarter and $14.3 million compared to the prior year quarter. The revenue decrease compared to the prior quarter reflects a $3.1 million decrease in managed services revenue and a $1.6 million decrease in SI&A revenue. The decrease compared to the prior year quarter reflects a $10.3 million decrease in managed services revenue and a decrease of $3.9 million of SI&A revenue. Revenue continues to be impacted by previously announced reductions on offshore drilling. SG&A expenses were $11.9 million in the current quarter compared to $14.4 million in the prior quarter and $17.2 million in the prior year quarter. The decrease in SG&A expense reflects savings from our restructuring and cost reduction activities over the past year. GAAP net loss attributable to common stockholders was $2.2 million or $0.11 per share in the current quarter, compared to a net loss attributable to common stockholders of $3.8 million or $0.21 a share in prior quarter and net loss attributable to common shareholders of $1.3 million or $0.08 a share in the prior year quarter. During the first quarter of 2017, adjusted EBITDA was $7.2 million compared to $9.4 million in the prior quarter and $10.7 million in the prior year quarter. The decrease resulted primarily from lower revenue, partially offset by reductions in ongoing operating expenses. CapEx were $3.2 million in the first quarter compared to $3.7 million in the prior quarter and $4.9 million in the prior year quarter. As a result on leveraged free cash flow defined as adjusted EBITDA less capital expenditures was $4.1 million compared to $5.7 million in the prior quarter and $5.8 million in the prior year quarter. Turning to the balance sheet, as of March 21, 2017, cash was $55.2 million; networking capital excluding cash was $25.5 million and our outstanding long term debt excluding current maturities of $8.5 million decline to $45.7 million. Wrapping up, although our first quarter performance was influenced by continued softness in offshore oil and gas activity, we are experiencing some indicators of recovery including an increase in overall site, key offshore production win and systematic integration contract wins leading to significantly increased SI&A backlog. RigNet continues to make improvements in its cost structure and processes, all with the clear object of improving operating leverage and scalability. As the energy industry continues to show signs of recovery, we continue to believe that by focusing on key relationships and by developing new customers, we have opportunities to generate new revenues by becoming more relevant and upstream, midstream and downstream operations with not only our core managed services offering, but also IoT, SCADA and system integration services. Importantly as we pursue new service offerings with our customers, we continue to strengthen our balance sheet by focusing on cash cycle, reducing debt and maintaining strong liquidity to better-position us for organic and inorganic investment opportunities. With that, Steve and I would be pleased to address any questions that you may have. Operator, please open the line.

[Operator:]

Certainly. [Operator Instructions] And we have a question coming from the line of Andrew Carmichael with Simmons. Your line is now open.

[Andrew Carmichael:]

Good morning, guys. Just one question for me.

[Chip Schneider:]

Hi, Andrew.

[Andrew Carmichael:]

In going through the press release, one of the things we noticed was a nice sequential pick up in your other sites category, which as you pointed out is principally based on U.S. land. It's actually seeing the track to expansion in U.S. onshore rig count [ph] pretty closely in Q1? I was wondering if you could perhaps give us a sense of geographic mix and maybe you could provide any insight with respect to the market opportunity you see there in the onshore growth recovery that is currently under way? Thanks.

[Steven Pickett:]

Sure. In terms of mix, most of the land activity was that was indeed U.S. based and we're hopeful that this is an indication that there is more growth yet to come as it relates to a number of sites in the U.S. that are opportunities for us to deliver our services at. I think it's also important to note that we did have a net pick up of 10 production sites as well, which are higher revenue sites and represent our ongoing focus to continue to drive diversification on our revenue stream into non-Rig type of assets.

[Chip Schneider:]

And Andrew, both for the U.S. activities we're seeing is in West Texas generally or in basin, that type of area. That's where a lot of the general activity is going on and that's what we're seeing some of the best opportunities.

[Andrew Carmichael:]

Got it. Thanks, guys.

[Operator:]

[Operator Instructions] And our next question comes from the line of Walt Chancellor with Macquarie. Your line is now open.

[Walt Chancellor:]

Good morning, guys.

[Steven Pickett:]

Hey, Walt.

[Walt Chancellor:]

Just wanted to ask you how the tone of pricing conversations is proceeding with the customers. Are you still seeing a lot of pressure there or things normalizing a bit? I guess any color that you could provide? It would be greatly appreciated.

[Steven Pickett:]

Yes, Walt. This is Steve. We do see pressure. I wouldn't suggest that we've seen anything abnormal as it relates to pricing pressure in this most recent period.

[Walt Chancellor:]

Okay. And then just a few other quick ones if I could. There's obviously a lot of chatter out here in the industry from both services companies and ENPs about big data, automation and it's a bit open-ended, but I'm curious as rigs and sites are going back to work in North America in 2017, if you're seeing any tangible differences in bandwidth needs or additional services? Is any of that push being reflected in your business yet?

[Steven Pickett:]

Yes, Walt. There may be a couple of comments on that. Number one, we certainly are aware of that industry focus around more big data analytics and more technology to drive operational efficiencies and I think that's really what's behind our move to develop a stronger over-the-top portfolio. And also comment in terms of bandwidth that certainly our expectation as more big data analytics are used and more applications are used, we expect that to drive an increase in bandwidth demands as well, and certainly, we've seen some of that through the course of first quarter.

[Walt Chancellor:]

Okay, great. And then just one final one; sorry if I missed this in the prepared remarks. But those production sites that you picked up, was that sort of one large operator or was that a variety of opportunities that came your way?

[Chip Schneider:]

Those are a variety of opportunities that came our way. A lot of the time our existing customers are just expanding their activities, so we're bringing on a lot of business that they're also acquiring from their customer base.

[Walt Chancellor:]

Okay, got it. Thank you.

[Operator:]

And at this time, I'm showing no further questions. With that said, I'd like to turn the conference back over to Chip Schneider for closing remarks.

[Chip Schneider:]

Okay. Well, we appreciate everyone's participation this morning and we look forward to talking to you again after the second quarter. Thank you very much.

[Steven Pickett:]

Thank you, all.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.